What is my Franchise Tax Status?

The Texas State Comptroller imposes a franchise tax on each taxable entity formed in Texas or doing business in Texas. (NEXUS) This is considered a privilege tax – you pay the franchise tax for the privilege of operating in Texas.  All businesses in Texas must file a franchise tax report regardless of whether they are required to pay the tax. Click here to view your franchise tax status. 

Here is a list of different Franchise Tax Statuses:  

• Active, Eligible for Termination/ Withdrawal: the entity has met franchise tax requirements to file for termination or withdrawal with the Secretary of State.
• Forfeited: the entity’s Right to Transact Business in Texas is forfeited. 
• Not Established: the entity’s franchise tax responsibilities ended because the entity has not completed a franchise tax questionnaire with the Comptroller 
• Franchise Tax Ended: the entity’s franchise tax responsibilities ended because the entity has ceased to exist in its state or county of formation or has ceased doing business in Texas. 
• Franchise Tax Involuntarily Ended: the entity’s registration or certificate was ended as a result of a tax forfeiture or an administrative forfeiture by the Texas Secretary of State 

Entities Subject to Franchise Tax Include:  

• Corporations 
• Limited Liability Companies (LLCs), including series LLCs 
• Banks
• State-limited banking associations 
• Savings and loan associations 
• S Corps 
• Professional Corporations 
• Partnerships (general, limited, and limited liability); 
• Trusts
• Professional associations 
• Business associations 
• Joint ventures 
• Other legal entities  

Entities Not Subject to Franchise Tax Include: 

• Sole Proprietorship (except For single member LLCs) 
• General Partnerships when direct ownership is composed entirely of natural persons (except Limited Liability Partnerships) 
• Entities exempt under Tax Code Chapter 171, Subchapter B
• Certain unincorporated passive entities
• Certain grantor trust, estates of natural persons, and escrows
• Real estate mortgage investment conduits and certain real estate investment trusts
• A nonprofit self-insurance trust created under Insurance Code Chapter 2212
• A trust qualified under Internal Revenue Code Section 401(a)
• A trust exempt under Internal Revenue Code Section 501(c)(9)
• Unincorporated political committees.

Franchise Tax Rates, Thresholds, and Deduction limits for 2022-2023

Item	Amount
No Tax Due Threshold	$1,230,000
Tax Rate (retail or wholesale)	.0375%
Tax Rate (other than retail or wholesale)	.75%
Compensation Deduction Limit	$400,000
EZ Computation Total Revenue Threshold	$20 Million
EZ Computation Rate	.331%

Calculation of the Franchise Tax 

The franchise tax due is based on the taxable entity’s margin. Unless a taxable entity qualifies and chooses to file using the EZ computation, the tax base is the taxable entity’s margin. This is computed in the following ways:

• Total revenue times 70%
• Total revenue minus cost of goods sold (COGS)
• Total revenue minus compensation; or
• Total revenue minus $1 million (effective Jan.1, 2014)

Total Revenue

Total revenue is determined from revenue amounts reported for federal income tax minus statutory exclusion.

• Exclusions from revenue include the following:
• Dividends and interest from federal obligations
• Schedule C dividends
• Foreign royalties and dividends under Internal Revenue Code Section 78 and Sections 951-964
• Certain flow-through funds
• Other industry-specified exclusions.

See Tax Code Section 171.1012 and Rule 3.587 for more information about total revenue.

Cost of Goods Sold

Cost of goods generally includes costs related to the acquisition and production of tangible personal property. There are other cost of goods sold allowance for certain industries. Taxable entities that only sell services will not generally have a cost of goods sold deduction

See Tax Code Section 171.1012 and Rule 3.588 for more information about the cost of goods sold.

Compensation

The compensation deduction includes the following:

• W-2 wages and cash compensation paid to officers, directors, owners, partners, and employees (including net distributive income to natural persons) for the 12-month period upon which the tax is based, subject to the inflation-adjusted per person wage and cash compensation limitation; and
• Benefits are provided to all personnel to the extent deductible for federal income tax purposes, including workers’ compensation, health care and retirement benefits.

Compensation does not include 1099 labor or payroll taxes paid by the employer.

See Tax Code Section 171.106 and Rule 3.589 for more information about compensation.

Apportionment

Margin is apportioned to Texas using a single-factor apportionment formula based on gross receipts.

See Tax Code Section 171.106 and Rule 3.591 for more information about apportionment.

Available Credits

The following franchise tax credits are available:

• Temporary Credit for Business Loss Carryforwards under Texas Tax Code Section 171.111 (effective for reports originally due on or after Jan. 1, 2008)
• Research and Development Activities Credit under Texas Tax Code Chapter 171, Subchapter M (effective for reports originally due on or after Jan.1, 2014)
• Certified Historic Structures Rehabilitation Credit under Texas Tax Code Chapter 171, Subchapter S (effective for reports originally due on or after Jan. 1, 2015)

Combined Reporting

Taxable entities that are part of an affiliated group engaged in a unitary business must file a combined group must use the same method to compute margin.

See Tax Code Section 171.1014 and Rule 3.590 for information on combined reporting.

Franchise Tax Returns and Information Reports

Each taxable entity must file a Franchise Tax Report (No Tax Due, EZ Computation, or Long Form) and an Information Report (Public Information Report or Ownership Information Report).

Franchise Tax Rate, Thresholds, and Compensation Deduction Limits 

See Tax Rates for information on current and historic tax rate information.

Dues Dates, Extension, and Filing Methods 

Franchise tax reports are due on May 15 each year If May 15 falls on a Saturday, Sunday, or legal holiday, the next business day becomes the due date.

The Comptroller’s office will tentatively grant an extension of time to file a franchise tax report upon timely receipt of the appropriate form. Timely means the request is received or postmarked on or before the due date of the original report. See Franchise Tax Extensions of Time to File for more information.